Today, France is one step closer to choosing its next President. Following last night’s election, Emmanuel Macron and Marine Le Pen will go head-to-head in the second, final round in two weeks.
Characterised by anti-establishment rhetoric, populist politics and not without a scandal, the race to the Elysée Palace has been tense so far. At least the future just got a little clearer.
Although 11 candidates put their toe to the starting line, French elections are usually just a two-horse race between the right-wing conservatives and left-wing socialist party. It’s the first time in six decades that neither of France’s main parties have had a candidate in the second round.
Fanned by the global momentum behind populist politics, the French political stage doors opened this year and a hard-fought campaign turned this into a four-man race in the final weeks, including Jean-Luc Mèlenchon and François Fillon.
The French election process is usually split into two rounds. If no candidate receives 50% of the vote in the first stage of elections, the two most popular candidates will go head-to-head in the second round.
Elections always take place on a Sunday in France, so they’ll return to the polls on May 7. We’ll know who the next President of France is in two weeks.
How will the markets react?
Markets hate uncertainty, that’s why they usually get jittery around election time. With the four most popular candidates jostling for pole position before the first round, the outlook’s been muddier than usual.
Anti-EU rhetoric has been welcomed by the French people in this election. Marine Le Pen has vocally criticised the EU from the beginning, and wants to pull France out of the union and single currency. With ex-banker, pro-EU Macron taking the lead in the first round with just shy of 24% of the vote, the euro has strengthened on the news of the first round result.
As the last battle to the Elysèe Palace plays out, we’ll see who can cement their pole position. Both Hamon and Fillon have already endorsed Macron.
If Macron does take a comfortable lead, the spread between French and German bonds should unwind from its recent spread, the euro should strengthen and the volatility in euro-linked exchange rates should reduce. The French CAC index of its 40 biggest companies might get a boost as the markets digest this news.
If the opposite were true however volatility could easily return. A lead for Le Pen could see French and German bond spreads widen further and turbulence hit the French equity markets, as well as the euro.
Political risk management
Geopolitical tension is a characteristic of the modern day and there are bound to be bumps in the road over the course of the French election. Ripples from Brexit negotiations and other global tensions could also weigh on sentiment.
You can’t eliminate risk from the market, but you can reduce your exposure to it. Diverse portfolios can be an effective defence during periods of uncertainty. A range of asset classes and broad currency exposure should help to reduce risk within your investment portfolio.
A long-term investment horizon should also encourage investors to ride out any market jitters or knee-jerk reactions, and prevent losses due to poorly-timed trades.